Sources:The World Bank, World Development Indicators 2011. UNDP, Human Development Report 2011.

Executive Summary

Hindered by the lingering effects of the country's 2008 post-election crisis, the Armenian government continues to struggle to overcome a daunting set of challenges, including a pronounced lack of legitimacy, a deeply polarized population, and general mistrust and unpopularity among the majority of the population. The past two years were also marked by a serious economic crisis, as declining remittances and reduced investment triggered new fiscal and budgetary pressure.

On a broader level, despite the country's democratic shortcomings, the political crisis alone was not sufficient to pose a significant threat of governmental change. As the government sought to move beyond the post-election crisis of 2008, the opposition was unable to harness public discontent and failed to offer any real political alternative. In this way, Armenian politics throughout the past two years could largely be characterized as a stalemate, with a deadlock between the authorities and the opposition in which neither side emerged as the clear winner.

Beyond the political stalemate, however, the government's lack of legitimacy and popular support undermined its capacity to manage the impact of economic crisis. Related obstacles to economic reform during this period were seen in the country's widening disparities in wealth and income, the negative effects of entrenched corruption, and the barriers to market reform from powerful commodity-based cartels or semi-monopolies, commonly referred to as oligarchic groups.

However, even in the face of these related political and economic challenges, there has been some notable progress in reform. The Armenian government has demonstrated a seemingly more substantial level of commitment to deepening reform and a new sense of political will, driven by recognition of the necessity for political and economic reform. Key questions remain, however, as it is not yet assured that this new reform drive will be sufficient to overcome the country's structural economic problems or strong enough to tackle entrenched corruption and the powerful vested interests rooted in the incestuous relationship between business and politics. The public has shown similar doubts as to the value of the Armenian government's new sense of political will, which may prove to be too little, too late for effective reforms.

History and Characteristics of Transformation

With the sudden collapse of the Soviet Union, Armenia, like most of the former Soviet states, was ill-prepared for the onset of abrupt independence. After seven decades of Soviet rule, Armenia struggled to create the institutions necessary for statehood and sovereignty, and to adapt to the demands associated with introducing new political and economic reforms. From the onset of independence, Armenia faced additional challenges, ranging from an ongoing war with neighboring Azerbaijan that led to a blockade of the country's eastern and western energy, trade and transport links, to the devastating impact of a severe earthquake.

Against that backdrop, Armenia's political and economic transformation was largely defined by the specific circumstances of the time, which greatly impacted the trajectory of reform. More specifically, these factors included politics that were defined by strident nationalism that imposed informal limits to political discourse, debate and tolerance, and which tended to reinforce a trend toward authoritarianism. A second factor was an economy deformed by "conflict economics," in which the closed borders and blockade of the country led to a severe scarcity of goods, which in turn fostered widespread corruption and distorted market-based prices and economic activity.

Through the 1990s, the country gradually adapted to these impediments, overcame the isolation from a blockade that closed two of its four borders, and by the latter half of the decade, ultimately garnered an impressive record of double-digit economic growth. Despite that record and a gradual decline in poverty, there was a "paradox" associated with Armenia's economic growth, whereby several years of growth tended to result in an uneven and unequal distribution of wealth rather than any real improvement in living standards for the overwhelming majority of the population. Moreover, widening disparities in wealth and income have led to a serious socioeconomic divide on several levels, most notably reflecting a deep disconnect between rural and urban areas.

Politically, the past two years have been marked by a serious polarization of society, associated with the conflict between opposition supporters and an increasingly unpopular government. This political polarization has been exacerbated by a parallel socioeconomic divide between a small wealthy elite and a much larger population struggling with limited economic opportunity and declining purchasing power.

A final key characteristic of Armenia's transformation is rooted in what has now become an increasingly unsustainable economic system. More specifically, the vulnerability of the Armenian economy, despite its relative "incubation" due to closed borders and limited links with the broader global economy, is associated with an inherent structural fragility. This in turn is composed of three elements: first, a dangerous dependence on the influx of remittances, or money from Armenians working abroad; second, a narrow reliance on the country's service and construction sectors as the main drivers of economic growth; and third, a closed "oligarchic" economic network centered on several informal commodity-based cartels or semi-monopolies.

For the Armenian government, a lack of legitimacy and low level of widespread popular support have further imperiled its attempts to overcome the combination of structural fragility, entrenched corruption and the influence of powerful business interests, known as oligarchs, who have extended their power and influence to the political arena. The political context over the past two years was also defined by the memory of tainted elections, which has accelerated the erosion of public trust and support. Moreover, much of the Armenian population has now grown accustomed to flawed elections, economic inequality and a lack of democratic governance. Over time, this has increasingly fostered apathy and cynicism among the population, which has disengaged from politics and is mistrustful even of real achievements of reform. Even the virtual "awakening" of the normally passive population during the tragic and violent post-election crisis of 2008 seemingly proved to be temporary. But the return of widespread apathy and public mistrust has emerged as one of the most significant obstacles to meaningful political change and economic development. And despite the passivity, simmering discontent, frustration and anger over mounting disparities of wealth and income in Armenia cannot be easily overlooked.

The project analyzes development and transformation processes toward democracy and a market economy in international comparison. To be updated every two years, the Transformation Index BTI provides a ranking that combines qualitative, in-depth evaluations with quantitative scores for the performance of 128 developing and transition countries. The BTI measures the current state of democracy and market economy in a given country, its evolution over the past two years and the quality of governance performed by its leadership. The data collected will contribute to the development of strategy recommendations for the political management of transformation.